) fourth-quarter 2013 adjusted earnings per share (EPS) from
continuing operations of $1.03 surpassed the Zacks Consensus
Estimate by 9.6% and the year-ago earnings by 2%. The adjusted
EPS in the reported quarter excludes restructuring and
integration charge of 6 cents compared to exclusion of 14 cents
in the year-ago quarter for the same.
Full- year 2013 adjusted EPS from continuing operations came
in at $4.00 although remained well ahead of the Zacks Consensus
Estimate of $3.91, it declined 8.3% year over year.
Reported EPS in the fourth quarter was $0.97, reflecting an
increase of 11.5% year over year. The 2013 reported EPS was
$5.31, up 35.4% from the previous year.
Revenues from continuing operations for the fourth quarter of
2013 were down 1.0% year over year to $1.76 billion. However,
revenues remained marginally ahead of the Zacks Consensus
Estimate of $1.73 billion. Full-year revenues from continuing
operations of $7.14 billion beat the Zacks Consensus Estimate by
a whisker, but remained 3.2% below 2012 revenues.
Volume (measured by the number of requisitions) increased 2.3%
year over year as recent acquisitions by the company added 3% to
Revenues per requisition were down 3% primarily due to reduced
reimbursement (2% of the reduction). Moreover, the business mix
impact of Quest Diagnostics' recent toxicology acquisition
contributed to the rest of the decline in revenues per
We believe that the overall soft industry trends leading to
low volume growth were a dampener for the company. In addition,
lower healthcare utilization and reimbursement cuts acted as
other major deterrents. We expect this challenging scenario to
adversely affect Quest Diagnostics' peer
Laboratory Corporation of America Holdings
) as well, which is scheduled to release its fourth-quarter 2013
results on Feb 7.
Among operating costs, cost of services during the reported
quarter stood at $1.05 billion, down 2.05% year over year.
Selling, general and administrative (SG&A) expenses edged
down 1.4% to $415 million. The company did not incur any
operating expenses in the 'Other' category compared to $4 million
incurred in the year-ago quarter. Accordingly, adjusted operating
margin in the quarter expanded 50 basis points (bps) to 16.5% on
adjusted operating income of $290 million.
Quest Diagnostics exited 2013 with $187 million in cash and
cash equivalents, down from $295.6 million at the end of 2012.
Cash provided by operating activities for the year was $652
million compared with $1.18 billion a year ago. The company is
focused on enhancing shareholder value and improving return on
Quest Diagnostics recently made a 10% hike in quarterly
dividend to 33 cents a share or $1.32 annually.
Quest Diagnostics also posted it 2014 guidance. Amid a
challenging volume environment, the company expects 2014 revenues
to remain 2% below the 2013 level. The current Zacks Consensus
Estimate of $7.12 remains ahead of the projection.
2014 EPS is expected to remain in the range of $3.90−$4.10.
The Zacks Consensus Estimate of $4.20 remains way above the
Cash provided by operations outlook is $900 million and
estimate for capital expenditure is $300 million.
Quest Diagnostics has been focusing on areas with high
potential such as gene-based esoteric testing for cancer,
cardiovascular disease, infectious disease and neurological
disorders. The company has experienced increasing demand for
gene-based and esoteric tests compared to routine tests on
account of increased esoteric mix contributed by Athena and
As part of this strategy, in Jan 2014, Quest Diagnostics
announced a multi-year deal with
Life Technologies Corp.
). Per the deal, Quest Diagnostics can use Life Technologies' Ion
Torrent, a next-generation sequencing (NGS) platform for the
development of molecular tests.
Quest Diagnostics has also signed a similar agreement with
) whereby it will be allowed to use the latter's MiSeq sequencing
and genotyping technology platform and related reagents for
molecular laboratory-developed tests. These deals are consistent
with Quest Diagnostics' aim of becoming a global leader in
diagnostic and healthcare services. Quest Diagnostics has been
working on strengthening its suite of diagnostic tests for quite
some time now.
In 2013, Quest Diagnostics launched BRCAvantage to assess
mutations in the BRCA1 and BRCA2 genes related to hereditary
breast cancer. The company also offers advanced testing services
for myelodysplastic syndromes. In a bid to enhance its
diagnostics services, in January this year, Quest
Diagnosticssigned a definitive agreement to acquire Solstas Lab
Partners Group and its subsidiaries.
We remain cautious about Quest Diagnostics as it is
continuously witnessing challenges with regard to testing volume
and reimbursement cuts. Concerns also linger about the soft
industry trends due to a decline in physician office visits, flat
pricing and low organic revenues.
Moreover, a disappointing fiscal 2014 guidance reflects no
improvement in the industry trend going forward, which adds to
our concerns. The stock retains a Zacks Rank #4 (Sell).
QUEST DIAGNOSTC (DGX): Free Stock Analysis
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LABORATORY CP (LH): Free Stock Analysis
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